Abstract

This critical review of the vast body of empirical literature on foreign direct investments (FDI) in central and eastern European countries during the post-Communist transition period identifies three categories of determinants: those about which there is a consensus, those with mixed results, and thos e that have not been sufficiently studied. These writings agree on the decisive impact of most economic factors (market potential, the opening of trade and distance from the EU-15) and institutional factors (liberalization of the economy, the quality of the legislative framework and prospects for joining the EU). In contrast, certain intuitively and theoretically important factors (labor costs and characteristics of the labor market, the perception of country risk, and competition in local markets) have much more ambiguous effects even though they have received considerable attention. Most financial factors (the financing of firms, public finances and evolution of exchange rates) have been the focus of too few studies for detecting their impact. Moreover, the nature and determinants of FDI changed during the transition period, as the share of efficiency-seeking investments from the EU 15 increased to the detriment of market-seeking investments with the goal of penetrating local markets, especially in the small countries of central Europe. After pointing out major shortcomings in the literature, several approaches are proposed for future research.